Biodiversity in use-of-proceeds bonds ‘skewed towards carbon focus’

A relatively low proportion of proceeds from green and sustainability bonds is being channelled to biodiversity protection or restoration, while impact from these allocations is mainly measured in avoided emissions, according to research by Barclays.

In a previous report, analysts at the UK bank noted that biodiversity is the second-biggest focus for fixed income investors, behind climate and emissions. Nevertheless, allocations to the area remain limited.

Barclays analysts found that, while 13 percent of index-eligible corporate green bonds and 24 percent of similar sustainability bonds include biodiversity in their eligible project categories, allocation reporting by the 40 largest issuers in this category shows that just 55 percent directed funding towards biodiversity.

Of the money raised by issuers with frameworks that include biodiversity projects as eligible investments, only 11 percent was spent on biodiversity. This figure rises to 19 percent when issuers that include biodiversity projects as eligible but did not put any money towards them are excluded.

“This suggests that, while issuers include biodiversity projects as eligible use of proceeds in order to retain flexibility on how they spend proceeds, many do not currently have a clear biodiversity plan or a pipeline of nature-specific projects,” the analysts said.

There are exceptions. A bond from French banking group BPCE was labelled a “sustainable agriculture” bond and allocated 100 percent of its proceeds to biodiversity, while food-processing company Archer Daniels Midland has allocated roughly 80 percent to biodiversity projects.

Of issuers that do finance biodiversity projects, a large share of proceeds go towards nature-based solutions, “predominantly entered upon their carbon benefits”. Half of allocation was to forestry projects, while just 23 percent went to terrestrial conservation projects and 18 percent to sustainable agriculture.

Only 5 percent was allocated to marine biodiversity, although the analysts said they expected this to rise after the High Seas Treaty was signed in September and guidance for dedicated blue bonds was published.

Impact KPIs 

The carbon slant is also reflected in impact reporting. The most common KPI for biodiversity projects is sequestered carbon or avoided emissions, which Barclays suggests reflects the lack of consensus on what biodiversity KPIs to use and the relative immaturity of biodiversity data collection.

Analysts at the UK bank expect the lack of biodiversity allocation to persist in the short run, given the difficulty in generating cashflows from biodiversity projects. They noted that more opportunities exist in the sovereign market, where a higher proportion of issuers include biodiversity as an eligible category.

As nature and transition risks manifest, however, Barclays expects the commercial case for corporates to commission nature projects – “and thus the incentive to issue labelled bonds to finance these” – to increase in sectors with large nature impacts and dependencies.

Turning to the sustainability-linked bond market, just two of the 209 bonds in the bank’s SLB database include biodiversity KPIs: packaging company Klabin, which has committed to reintroduce two threatened species to its ecological park in Brazil, and Uruguay, which aims to retain or increase native forest coverage.

Barclays does not include circular economy and water management in its biodiversity category.

With increasing investor interest and new frameworks such as TNFD, Barclays also said it expected biodiversity-related targets to become more common in the SLB market, although not as popular as emissions metrics.